In 2008, most of the United States lenders managing mortgage portfolios were adversely affected by a financial crisis rooted in the collapse of the real estate market and the resulting financial disaster caused thereby. For example, according to one study, in 2008 more than 2.3 million consumers faced foreclosure proceedings, and as of February 2009, 8 million American homes were at risk of foreclosure.
In 2009, the American economy experienced a rebalancing which will, at least in the short run, has caused individual and institutional pain. All stakeholders in the mortgage and housing crises have suffered. It appears likely that all the stakeholders are in for more suffering in the future. For example, in the next three years (between 2009 and 2011), nearly $100 billion in adjustable-rate mortgages will reset to unsupportable levels as the shrinking economy and strained credit market rob consumers of their ability to refinance.
Some of the distressed borrowers, arguably, should never have been granted mortgages in the first place. Other borrowers are too hobbled by financial reverses or hobbled with overextended credit to support even modified payments. There is a good argument that foreclosure is the proper path for them. However, these borrowers are in the minority of troubled borrowers.
For the vast majority of other troubled borrowers, policy makers, politicians, and most stakeholders feel that loan modification is considered the best way to keep consumers in their homes today and going forward, while mitigating losses to lenders, servicers, investors, taxpayers, and society. However, the current landscape is rife with examples of unfair extremes with respect to loan modifications. Some “modifications” are simply rearrangements of mortgages that are too large for the reduced value of underlying property. These often result in re-default. At the other end of the spectrum are so-called “cram downs,” heatedly opposed by the mortgage industry, in which bankruptcy judges order reductions in loan principal to reflect the reduced value of the home. Depending on the size of the principal reduction, this may deprive investors of fair profits.
In addition, the best, well-intentioned attempts by multiple stakeholders to stabilize the housing market through mass loan modification programs have fallen woefully short. In 2009, for example, there were at least eight different “major” modification programs underway, sponsored by mortgage lenders and servicers, Fannie Mae/Freddie Mac, the FDIC, and consumer advocates. None has gained sufficient traction to put a floor under housing prices, which would in turn put a floor under the U.S. economy. Some programs attracted few modification applications. Others have resulted in six-month re-default rates as high as 55 percent.
Therefore, there is a need for an apparatus and method capable of crafting loan modifications that are fair to borrowers, lenders, and investors in hopes of slowing or halting the mortgage crisis and, hopefully, reversing the economy's decline.